In a Nutshell | Education (2024)

The Reserve Bank conducts monetary policy to achieve its goals of pricestability, full employment, and the economic prosperity and welfare oftheAustralian people.

It does this by targeting inflation between 2-3%. The cash rate is the primary toolused to manage inflation. The RBA has, at times,also used other tools, including targetinglonger-term interest rates and buying and sellinggovernment bonds.

The Reserve Bank Board meets eighttimes a year, on the first Tuesday of themonth, to determine the appropriatemonetary policy settings.

Monetary policy, including the cash rate, hasa strong influence over interest rates in theeconomy, such as lending and deposit rates.

More expansionary monetary policy, like areduction in the cash rate, typically stimulatesspending and inflation. Tighter monetarypolicy, like an increase in the cash rate,typically dampens spending and inflation.

If inflation is likely to be too high (low) for toolong, the Reserve Bank Board would typicallytighten (loosen) monetary policy, such as byincreasing (decreasing) the cash rate.

The Reserve Bank has several monetarypolicy tools. It conducts transactions indomestic financial markets to implementmonetary policy.

Prior to the COVID-19 recession, the cashrate target was the only actively used toolof monetary policy. The Reserve Bank keptthe cash rate on target by conducting ‘openmarket operations’.

The Reserve Bank operated a ‘corridor system’,lending cash to banks a little above the cashrate target and accepting deposits a littlebelow the cash rate target.

During the COVID-19 recession, the ReserveBank actively used tools in addition to the cashrate, including ‘forward guidance’, price andquantity targets for the purchase of governmentbonds and a ‘term funding facility’.

In addition to reducing longer-term interestrates, these policies have substantiallyincreased the amount of cash in the bankingsystem, reducing banks’ need to borrow cashfrom the Reserve Bank or each other.

As a result, the Reserve Bank now effectivelyoperates a floor system. The cash rate trades justabove the interest rate at which banks candeposit cash with the Reserve Bank.

The Reserve Bank has an inflation target to achieve the goals of price stability, full employment,and prosperity and welfareof the Australian people.

Australia’s inflation target is to keep consumer price inflation between 2–3%.

Low and stable inflation reduces uncertaintyin the economy, helps people make savingand investment decisions, and is the basisfor strong and sustainable economic growth.

The Reserve Bank adopted the inflation target in the early 1990s. The Bank and the government agreeon the importance of the inflation target and formally set out this agreement in the Statementon the Conduct of Monetary Policy.

The Reserve Bank uses the cash rate andother monetary policy tools to stimulateor dampen economic activity such thatinflation is in the target range.

If inflation is likely to be too high (low) for too long, the Reserve Bank Board would typicallytighten (loosen) monetary policy to bring inflation back to target, such as by increasing(decreasing) the cash rate.

The Council of Financial Regulators (CFR) is the coordinating bodyfor Australia's main financial regulatory agencies. It includes theReserve Bank of Australia (RBA), the Australian PrudentialRegulation Authority (APRA), the Australian Securities andInvestments Commission (ASIC) and the Australian Treasury.

The role of the CFR is to contribute to the efficiency andeffectiveness of regulation and to promote the stabilityof the Australian financial system. The Governor of theRBA chairs the CFR and each of the agencies plays adifferent role in promoting financial stability.

The RBA is responsible for promoting overall financialsystem stability. It does this by managing and providingliquidity to institutions, regulating the payments system(including financial market infrastructures) andmonitoring risks in the financial system.

APRA is responsible for prudentialsupervision of financial institutions toprotect the financial interests ofdepositors, insurance policy holdersand superannuation fund members.

ASIC is responsible for market integrityand consumer protection across thefinancial system and has a role to enforcethe law under key legislation, such as theCorporations Act.

The Australian Treasury is responsible foradvising the government on financial stabilityissues and events and on the legislative andregulatory framework underpinning thefinancial system.

The Reserve Bank helps maintain a healthyand stable financial system. This is fundamentalto the economic prosperity and welfare ofthe Australian people.

In a healthy financial system, money ischannelled between savers and borrowers sothat different activities, like spending byhouseholds or investment by businesses,can be undertaken.

A healthy financial system is resilient sothat money keeps flowing even whenthe economy slows or there aredisruptive events.

The Reserve Bank ensures that there areadequate funds in Australia's financial system.During the global financial crisis, the ReserveBank provided temporary extra funding tothe system.

In normal times, the Reserve Bank watches for emerging risks in thefinancial system. Twice a year it publishes a financial ‘health check’in the Financial Stability Review. Where risks pose a threat to thefinancial system, the Review explains the issue and thepolicy response.

The Reserve Bank chairs the Council of Financial Regulators, whichincludes the prudential regulator APRA, the corporate and financialservices regulator ASIC, and the Australian Treasury. The Council meetsat least four times a year to discuss current issues and policies. In afinancial crisis, it coordinates responses across the member agencies.

The Reserve Bank publishes and monitors data on the stock of money and credit inAustralia. These data are called the financial aggregates. They can be used tohelp understand developments in the economy.

Money can be held in different forms – for example, as banknotes in your walletand as deposits in the bank. The main measures of money are the money base,currency, M1, M3 and broad money.

Credit is a measure of funds borrowed from the banking system. People borrow topurchase things such as houses, cars and holidays. Businesses also borrow toinvest in projects and buy assets. Total credit can be broken down into housingcredit, personal credit (such as on credit cards) and business credit.

Monitoring changes in the stock of money and credit is important because it canhelp us understand more about what's happening in the economy. Monitoringchanges in credit can also be helpful for identifying risks to financialstability.

Higher credit growth tends to be associated with more positive economicconditions (e.g. people wanting to borrow and spend more and banks being willingto lend more). Lower credit growth tends to be associated with less positiveeconomic conditions. But rapid credit growth could signal growing risks tofinancial stability, particularly if debt levels are already high.

Changes to the cash rate can influence credit growth because of the effect thatthe cash rate has on other interest rates related to credit, such as on housingloans, credit cards and business loans.

When you pay for something,you can usually choose howyou pay. Here are some of themost common payment methods.Debit card 51%. Credit card 26%. Cash 13%. Other 10%.

When you pay – for example, in a shop – theshop owner faces costs for accepting yourpayment, including bank fees and theopportunity cost of their time. These costsdepend on how you pay.

Cash is usually a low-cost method, particularly for smalltransaction sizes. A shop owner might not pay any feesrelated to the use of cash, but may face other costs(for example, time taken to deposit the cash received).

Debit cards (which use your own moneyfrom your bank account) are generally lowercost than credit cards.

Shop owners usually pay higher fees to acceptcredit cards (which borrow money from your card provider).Fees vary depending on the type of card, and aretypically higher for cards that provide rewards(such as frequent flyer points) to the cardholder.

If you use a more expensive payment method, the shop ownerhas to pay for it. Shop owners can either increase the prices ofwhat they sell for all customers, or can pass on the cost directlyto customers that use high-cost methods by adding a surcharge,which encourages people to switch to low-cost methods.

The Reserve Bank is responsible for designing, producing and issuing Australia's banknotes.Its goal is to produce banknotes that everyone can trust as a payment mechanism and a store of value.

Australia has five denominations of banknotes: the $5, $10, $20, $50 and $100. There are more than2 billion banknotes on issue, worth more than $100 billion.

Australia has very low levels of counterfeiting.The Reserve Bank keeps our banknotes safe by researching anti-counterfeit technologies and upgradingsecurity features.

Australia's banknotes are printed on polymer (plastic). They start out as plastic pellets thatare melted down into large sheets, and then designs are printed onto them.

Each banknote is produced with a unique serial number. The two letters represent the banknote'sposition on the sheet and the first two numbers indicate what year the banknote was printed.

Polymer banknotes are recyclable. At the endof their life cycle, old and damaged banknotescan be recycled into products such as building materials and compost bins.